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Mayday! Mayday!

Apart from the M&A activity, which saw the birth of JetLite and Kingfisher Red, many carriers are signing agreements with regional players, like the GoAir-MDLR Airlines pact.

     Print Edition: November 13, 2008

By the time you read this, airlines would have tacked on a new fee to their fares. The transaction fee, scheduled to be introduced on 1 November, will add Rs 350 to economy fares, Rs 500 to business class fares and up to Rs 10,000 on international flights. This comes on the heels of at least seven price hikes in this year alone. To compound the consumer misery, there are fewer flights to choose from—domestic airlines scrapped more than 2,000 weekly flights in July alone.

Then again, in a few months’ time, there may be fewer airlines to choose from. The wave of mergers and acquisitions since 2007 is likely to see the demise of smaller players apart from the reduction in flights. In fact, Raghu Menon, chairman, Air India, has gone on record to say that no more than four or five airlines will survive the downturn.

All of this may have come as a nasty surprise given that till June last year the aviation sector was boasting Rs 0 fares, 40% growth in passenger numbers and dizzying expansion. Sure, airlines were posting losses—Jet Airways lost Rs 2.53 billion last year and Kingfisher recently reported a nine-month loss of Rs 1.88 billion—and aviation turbine fuel prices have been an omnipresent worry, up 54% since October 2007 despite the recent cuts. But that is hardly news. So why the sudden brouhaha, pink slips, fewer flights et al?

 The current state of affairs is a natural progression of events, not an overnight development. The global market contraction just brought matters to a head by inflating the already staggering airline losses. These losses are a result not only of the spiralling ATF prices—made worse by the fact that jet fuel in India is about 60-70% more expensive than in other parts of the world thanks to duties and taxes—but also of nearsighted strategies. These included the decision to wage a fare war to gain market share. It seemed like a reasonable strategy if the volumes went up, but backfired as the demand slumped.

The problem became messier as airlines went shopping for more and more aircraft. The assumption was that supply would create its own demand. But it only led to near-empty flights when the Great Indian Middle Class decided to take a break from holidaying and splurging. The expansion streak had another negative impact: over-hiring and overtly fat pay-packets.

A reality check prompted by the global meltdown forced the airlines to consolidate. Apart from the M&A activity, which saw the birth of JetLite and Kingfisher Red, many carriers are signing agreements with regional players, like the GoAir-MDLR Airlines pact. This is an attempt to adhere to archaic aviation laws—airlines have to reserve a percentage of seats for non-profitable routes like the Northeast and J&K—without investing in low-load, high-cost sectors. Now we are in the second phase of consolidation, which recently saw Jet and Kingfisher sign an alliance to reduce costs. The LCCs are likely to sign similar pacts in a survival bid. Such a decision to pool resources is bound to lead to lay-offs and fewer flights.

It’s a pity that the common man, who had just begun to sprout wings, will be grounded in the process. At least till the market finds its equilibrium, both in terms of fares and capacity.

What the future holds for the...

Consumers
>> Independent, low-cost carriers may be on their way out.
>> Airlines are expected to move away from the no-frills structure.
>> Air fares are likely to continue to remain high in the near future.
>> Flights on some routes may be cancelled, or their timings altered.
>> Options like charter flights and fractional ownership will find more takers.

Investors
>> Industry is likely to be in the red for the next 18 months.
>> Opportunities from potential mergers and takeovers.

Industry
>> Re-evaluation of new aircraft orders.
>> Fleet and route rationalisation to correct excess capacity of over 30%.
>> Mergers and acquisitions and coordination with other airlines to pool resources.
>> Concessions on fuel taxes.

Employees
>> A reduction of at least 10% in staff salaries. Salary costs typically form about 15% of the total operating cost of an airline.
>> Job prospects are likely to fall courtesy fewer flights and staffsharing agreements between the airlines.

— Sushmita Choudhury

Word’s worth

Manmohan Singh, Prime Minister
“The short-term outlook is cloudy, but I am confident that the Indian economy has the resilience to sustain its growth momentum.”
— Manmohan Singh, Prime Minister

“The firms that performed in the earlier bull run—for example in the capital goods sector—might not be the best bets due to high interest rates, large capex and muted growth.”
—P.K. Agarwal, President, Research, Bonanza Portfolio

“Investors want to get out of risky positions and gold has been the beneficiary.”
— Pinakin Vyas, Chief Manager, Treasury, IndusInd Bank

“This is the right time to buy property. High interest rates have kept the prices from going up by at least 15%. Prospective buyers can also bargain for a 15-20% discount. That is a 30% benefit.”
—R.R. Nair, Director and CEO, LIC Housing Finance

Source: The Economic Times, Reuters and Rediff money

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